There are many myths about housing markets perpetuated by banks and the financial press. Two of these myths include (1) keeping people in a house keeps up the values, and (2) foreclosures reduce neighborhood values.

Many believe that allowing delinquent mortgage squatters to stay in place improves the condition of a property. Perhaps in rough neighborhoods prone to property crime, occupancy is better than abandonment, but in most neighborhoods, when delinquent mortgage squatters stay on, they property gets run down. Why would anyone spend any money to improve or even maintain a property in which they have no financial interest? If people were prone to do this, then landlords wouldn’t need to spend money maintaining rentals. Delinquent mortgage squatters have no landlord to call, so when something breaks, unless it makes the house unlivable, it goes unfixed. A property in poor condition is worth less than a well maintained one.

Many also believe that foreclosures reduce neighborhood values. Another recent federal reserve study concluded the conventional wisdom is wrong, foreclosures don’t reduce neighborhood values. I have long contended that foreclosures are not the problem, they are the cure. The real problem is, and always has been, property debt. Foreclosure removes that problem. Further, once a house goes through the foreclosure process and gets sold to a new owner, the value of that home rises to the general level of the neighborhood. Either the flipper who bought the foreclosure or the new owner improves the property to fix the problems left over from the delinquent former owner who didn’t maintain it.

As lenders have played the amend-extend-pretend game, they have allowed people to squat for as long as five years in some of these properties. The longer lenders allow these people to squat, the more these properties become run down, and the more neighborhood values drop. It’s really that simple. Plus, the cure for this problem is equally simple: foreclose on the squatters and recycle the property into the hands of a new homeowner who will care for it. But don’t take my word for it, read the report:

Abstract: In a recent set of influential papers, researchers have argued that residential mortgage foreclosures reduce the sale prices of nearby properties. We revisit this issue using a more robust identification strategy combined with new data that contain information on the location of properties secured by seriously delinquent mortgages and information on the condition of foreclosed properties. We find that while properties in virtually all stages of distress have statistically significant, negative effects on nearby home values, the magnitudes are economically small, peak before the distressed properties complete the foreclosure process, and go to zero about a year after the bank sells the property to a new homeowner. The estimates are very sensitive to the condition of the distressed property, with a positive correlation existing between house price growth and foreclosed properties identified as being in “above average” condition. We argue that the most plausible explanation for these results is an externality resulting from reduced investment by owners of distressed property. Our analysis shows that policies that slow the transition from delinquency to foreclosure likely exacerbate the negative effect of mortgage distress on house prices.

The decline in value, the “negative effects,” peak before the properties complete the foreclosure process. If the decline in value were caused by the foreclosure, the values would remain unchanged until the bank listed and sold the property. That isn’t what the researchers found. This has huge implications because now banks can foreclose under the guise of improving property values.

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Just say no to foreclosure moratorium

The recent change in laws in Nevada which essentially caused a statewide moratorium over the last year. The reduction in inventory also caused house prices to bottom and rise nearly 10% this year. Such occurrences would suggest broader foreclosure moratorium would help prices bottom in other locations. That is not the conclusion of the federal reserve.

Because foreclosure transitions in a given area are highly correlated with the number of outstanding distressed properties in the same area, one would find a significant, negative correlation between the sale price of a non-distressed property and the number of surrounding properties transitioning into fore- closure. Based on such results, one might conclude that implementing a fore- closure moratorium would increase house prices. However, such a conclusion would be wrong. Delaying transitions into foreclosure does not reduce the to- tal number of distressed properties, which is what exerts downward pressure on prices according to the true model. Indeed, over time, delaying foreclosures without stopping transitions into delinquency would increase the total number of distressed properties and thus serve to lower prices.

Wow! That could have been written on this blog. I have made the same argument for years. It’s shocking to see this kind of common sense in an academic study supported by real data and analysis put out by the federal reserve. There is hope for them yet.

Conclusions by the federal reserve

So what big-picture conclusions did the federal reserve economists draw from this work?

Houses that sell very close to all forms of distressed property appear to do so at slightly lower prices than otherwise similar properties in the same CBG that sell without the presence of nearby distressed properties. The effect appears when the borrower becomes seriously delinquent on his mortgage and disappears one year after the lender sells the foreclosed property to a new homeowner in an arms-length transaction. What can explain these empirical observations? … This refers to the tendency of financially distressed borrowers and lenders that do not derive consumption services from foreclosed property to underinvest in property maintenance, leading to physical deterioration of the property and, in turn, causing a reduction in the value of nearby property to potential buyers.

They examined other possible explanations and came to these conclusions:

The idea that a fall in demand leads to a fall in prices and an increase in foreclosures has strong support in theory and in the data. Default makes sense for a borrower only if he is in a position of negative equity, that is, if his mortgage debt exceeds the value of his home, and it is difficult to have negative equity without falling prices.

People who cannot afford their property yet have equity do not become foreclosures. They sell in an open market to obtain their equity. Foreclosures become much more common as borrowers submerge beneath their debts because they have few other options to get out from under their debt burdens.

The fact that the demand theory could explain the observed facts does not necessarily mean that it does explain them.

… a borrower who has only missed a few payments may have been in financial duress for quite some time, in which case the lack of investment in property maintenance might be a plausible explanation for the negative coefficient estimate associated with minor DQs.

The study found even being a little bit underwater cause many people to default. It suggests those defaults were caused by payment duress rather than strategic default from a borrower with little or no duress.

A popular alternative to the demand theory is the supply theory, which posits that a foreclosure increases the supply of property on the market and drives down prices. Unlike the demand theory, the supply theory is not an obvious consequence of standard economic theory. Normally, when we price long-lived assets like houses, we define supply as all of the assets that exist, not just the ones currently for sale. Foreclosures do not change the number of houses or the quantity of land in a market, so standard models would not predict any effect on prices.

The standard model does not take into account seller motivation. We could put every house in the country for sale tomorrow, and it wouldn’t impact prices. Most people would simply list their house at some ridiculous WTF listing price and have no impact on the market. Their motivation would be very low, so the price would reflect that. A classic example of this phenomenon is the “make me move” price on Zillow. It is a repository for the delusions of unmotivated sellers everywhere. If you have never checked these out, they are worth a laugh.

The supply story could potentially explain why prices rise after the REO sale: with the property now off the market, prices recover to their pre-delinquency level.

That’s exactly what happens. It’s also why beaten down markets across the Southwest are seeing 10% increases in price this year. The supply of REO by motivated sellers is reduced, so prices are bouncing back up to a new equilibrium. With interest rates being so low, buyers have some room to raise their bids, so we are seeing a sharp rebound rally. Of course, this only works as long as interest rates are very low and supply is unduly constricted. It is also going to cause sales volumes to plummet. We may see record low sales volumes over the next several months.

There are two reasons why seriously delinquent borrowers are unlikely to maintain properties. The first is that many of them have suffered cash-flow-depleting life events and discount future consumption heavily relative to current consumption. Effectively, this raises the hurdle rate on any investment in the property. The second problem is that many seriously delinquent borrowers expect to lose their homes and therefore, the long-term benefits of any investment would accrue to the ultimate owner of the property—the lender.

They got that one right. No delinquent mortgage squatter is going to improve the lender’s house.

The issue is that the amount of profitable investment in the property is a matter of discretion, and the owner of the property cannot be sure whether the manager has other incentives. As with all standard asymmetric information problems, the result would be a failure to exploit profitable gains from trade, in this case, investment in the property. Another way to put this is that the optimal mechanism for investment in single-family residential real estate is to sell the property to a small-scale investor who internalizes the costs and benefits.

Banks will not spend money improving a property even if it’s in their best interest to do so. It’s nearly impossible for an asset manager to quantify the increase in value, but it’s very easy to quantify how much more money the bank dumps into a losing loan. It’s easier and often wiser to error on the side of spending as little as possible and getting out as quickly as possible. Renovations can quickly become white elephants eating a bigger hole in a bank’s balance sheet.

So what does this report lay the groundwork for?

I think we are going to see a shift back away from short sales toward foreclosure. Right now, banks stopped foreclosing in hopes of getting more delinquent mortgage squatters to list their homes and sell them short. The losses on the short sales count toward the $25 billion settlement figure with the attorneys general across the country. However, as I have pointed out a number of times, short sales require the participation of the owner, and the people not paying their mortgages benefit far more from doing nothing than they do by participating in a short sale. If they do nothing, they get to live for free. If they complete a short sale, they will have to move out of their home and start paying rent. What is their incentive to do that?

Now that the federal reserve has acknowledged that delinquent mortgage squatters reduce neighborhood values and foreclosures improve them — whether this is accurate or not — it gives the GSEs and the member banks of the federal reserve a reason to start foreclosing again — or perhaps more importantly, it gives them some political cover to start foreclosing again. Now, banks can make the argument that foreclosing on the squatters improves neighborhood values. They can push back against the anti-foreclosure left-wing pander movement which opposes foreclosures.

I believe we will see a significant increase in foreclosures to process shadow inventory. House prices are moving up, MLS inventory is at acutely low levels, the GSEs are winding down their holdings, potential buyers who were foreclosed on three or more years ago have recovered credit, and the federal reserve has provided cover for the banks to push out the squatters. It may not be the perfect storm, and it may not result in a huge crash in prices, but we should start to see more foreclosures and more homes on the MLS. The only question is when.

After surveying more than 1,800 active home sellers, Redfin found that some of its customers are holding back from selling now because they believe patience will pay off in the form of higher offers for their home.

The survey revealed that 38 percent of respondents plan to wait more than a year before selling their home, while 25 percent said they plan on selling now. About 36 percent of homeowners plan on waiting somewhere between 3 months and 12 months.

“The would-be sellers we surveyed have made it clear that inventory is not going to meaningfully increase any time in 2012, which will limit sales volume gains-and the lift that real estate delivers to the economy this year,” said Redfin CEO Glenn Kelman. “We believe the main problem is not, as conventional wisdom would have it, that people can’t sell because they’re underwater on their mortgage. The problem with sales volume is that most home-owners just don’t want to sell.”

More than a quarter (27 percent) of respondents said now is a bad time to sell as opposed to only 13 percent who said now is a good time to sell. Half of the respondents were in the middle and said now is an OK time to sell.

Most respondents view the market as one that is favorable toward buyers, with 60 percent stating now is a good time to buy and only 3 percent stating now is a bad time to buy.

San Diego homeowner Jane MacKenzie stated, “I’ve carefully tracked prices on comparable homes in my neighborhood, but they have not yet risen to the level at which I’d want to sell; thus my desire to wait until spring 2013 (tentatively) and reevaluate the comps situation. Hopefully by then some of the volatility in the stock market and the U.S./international scary headlines may have settled down a bit.”

Homeowners expressed optimism for future home prices, with 80 percent believing they are bound to get a higher price for their home after a year or two.

The optimism though is somewhat restrained, with 65 percent of respondents believing prices will rise by a little in a year, and just 7 percent believing they will rise by a lot. Twenty-one percent believe prices will stay the same.

With rental prices increasing, almost half (46 percent) of respondents stated they are considering renting out their home instead of selling.

Redfin explained the move towards renting over selling is likely a factor pushing down inventory as would-be sellers buy a new home and rent out their former primary residence.

The biggest concern for sellers this year was the economy (49 percent), followed by short sales/foreclosures (34 percent), financing trouble (30 percent), and the anticipation for prices to rise (28 percent).

Relocation (30 percent) and a life events (30 percent) were the two main reasons homeowners made plans to sell.

The survey was conducted between August 10 to August 15 and included 1,816 people across 20 metropolitan markets.

San Diego homeowner Jane MacKenzie stated, “I’ve carefully tracked prices on comparable homes in my neighborhood, but they have not yet risen to the level at which I’d want to sell; thus my desire to wait until spring 2013 (tentatively) and reevaluate the comps situation. Hopefully by then some of the volatility in the stock market and the U.S./international scary headlines may have settled down a bit.”

I got a good laugh at reading this. Does this guy really think that home prices will go ballistic in the next 7 or 8 months? If he needs/wants to sell, this might be the easiest time in decades to unload a place. The kool-aid has quite a grip on people here in California. Just shaking my head…

Don’t underestimate the power that be. The EU monetary union fraud took 12 years to unravel and few more years to hit the fan. With the support of the Fed & the sheeple, America mortgage fraud could take much longer to ravel & hit the fan. In the meanwhile, the baby boomer is turning into the baby killer (Mortgage your children future and put them into future slave)

“In the meanwhile, the baby boomer is turning into the baby killer (Mortgage your children future and put them into future slave)”

That’s a sad by accurate analysis. The next generation is being asked (forced) to pay higher prices to pay off the excessive consumption and lack of savings of the baby boomers. Basically, if we don’t overpay for their houses, we will end up supporting them in other ways through increased costs of Medicare and Social Security. And after paying for their overpriced houses and supporting them in their old age, we will not have the same benefits when we get there.

Looks like the dragon will have to step aside: 2012 is now “The Year of the Housing Recovery,” according to RE/MAX.

The real estate giant released its National Housing Report for August 2012 (covering July), showing that both sales and prices have posted year-over-year increases for most of 2012.

Home sales appear to have peaked year-to-date in June, with July’s sales falling 9.4 percent month-over-month. However, sales were up 10.3 percent from July 2011, marking the 13th consecutive month for year-over-year sales gains.

Of the 53 metro areas surveyed by RE/MAX, 44 reported higher sales than one year ago, and 26 of those areas posted double-digit increases.

The median sales price in July was $169,000, a 0.6 percent drop from June, but a 3.7 percent increase over July 2011. The increase marks the sixth straight month in which the median price outdid itself year-over-year.

Forty-two of the 53 metro areas surveyed reported price increases over last year, 12 of which showed double-digit gains.

“It’s reassuring that both sales and prices continue to rise higher on a yearly basis, indicating that this housing recovery is real,” said Margaret Kelly, RE/MAX CEO. “Overall, the picture is getting brighter each month, but what we need for a sustainable recovery is a turn-around in unemployment and better availability of mortgages, especially for higher priced homes.”

The average days on market for homes sold in July was 82, a 2-day drop from June and a 6-day drop year-over-year. July is only the second month since September 2011 with a days on market below 90 and is the lowest average since July 2010.

The drop in average days on market was attributed to low inventory. Inventory levels for July fell 5.4 percent from June and 26.8 percent from July 2011, marking the 25th consecutive month for shrinking month-to-month inventories.

Given the current rate of sales, RE/MAX calculated the average months supply to be about 5.3, two months lower than the average 7.2 in July 2011.

In the report, RE/MAX said falling inventory represents a major challenge to the recovery.

“Inventory is now becoming a serious challenge to this recovering market, with available homes-for-sale falling 26.8 percent lower than the same month last year. Home sales could be much greater if more inventory was available, especially in the lower price range, where most sales are now occurring.”

WASHINGTON — After inheriting the worst economic downturn since the Great Depression, President Obama poured vast amounts of money into efforts to stabilize the financial system, rescue the auto industry and revive the economy.

But he tried to finesse the cleanup of the housing crash, rejecting unpopular proposals for a broad bailout of homeowners facing foreclosure in favor of a limited aid program — and a bet that a recovering economy would take care of the rest.

During his first two years in office, Mr. Obama and his advisers repeatedly affirmed this carefully calibrated strategy, leaving unspent hundreds of billions of dollars that Congress had allocated to buy mortgage loans, even as millions of people lost their homes and the economic recovery stalled somewhere between crisis and prosperity.

The nation’s painfully slow pace of growth is now the primary threat to Mr. Obama’s bid for a second term, and some economists and political allies say the cautious response to the housing crisis was the administration’s most significant mistake. The bailouts of banks and automakers are now widely regarded as crucial steps in arresting the recession, while the depressed housing market remains a millstone.

“They were not aggressive in taking the steps that could have been taken,” said Representative Zoe Lofgren, chairwoman of the California Democratic caucus. “And as a consequence they did not interrupt the catastrophic spiral downward in our economy.”

Mr. Obama insisted the government should help only “responsible borrowers,” and his administration offered aid to fewer than half of those facing foreclosure, excluding landlords, owners of big-ticket homes and those judged to have excessive debts.

He decided to rely on mortgage companies to modify unaffordable loans rather than have the government take control by purchasing the loans, the approach advocated by his chief political rivals in the 2008 presidential race, Hillary Rodham Clinton and John McCain.

The administration did not push for legislation to make mortgage companies help borrowers. The financial incentives it offered were often insufficient. And it responded slowly to warnings, including those in letters homeowners sent to Mr. Obama, that companies were not cooperating.

The result was a plan that failed to meet even its own modest goals, data shows. Mr. Obama said in Arizona a few weeks after taking office that the government would help “as many as three to four million homeowners to modify the terms of their mortgages to avoid foreclosure.” As of May, 4.3 million people had applied for aid, but only one million had received government-sponsored modifications, according to the most recent data. About a third of those turned away lost their homes, were facing foreclosure or filed for bankruptcy.

In June 2011, Mr. Obama conceded that his administration had not done enough. “And so,” he said, “we’re going back to the drawing board.”

(Reuters) – President Barack Obama said on Monday the U.S. housing market was “beginning to tick up” but was still not where it needs to be.

The state of the U.S. economy is key to Obama’s re-election chances on November 6, and housing prices remain weak in some pivotal election battleground states including Florida. Obama made the comments in an impromptu news conference in the White House briefing room.

Under the changes, which are effective Nov. 1, homeowners with missed mortgage payments and serious financial problems will need to submit fewer documents to be approved for a short sale.

In addition, homeowners will be eligible to be considered for a short sale even if they have not missed any mortgage payments. Lenders will be permitted to go ahead with those sales without Fannie and Freddie’s approval if the borrower is experiencing a financial hardship such as a death in the family, divorce, job loss or job relocation of more than 50 miles.

The changes also are designed to get prevent holders of home equity loans and other second mortgages from blocking these transactions by demanding more money.

I wish they would foreclose on every home that is behind. That way the housing prices would collapse. Rents would dramatically, and the rich would cry like the rats they are.

Too bad for you, I did not get foreclosed on, just got PRINCIPAL FORGIVENESS on the debt owed. No it’s not a FHA loan. It’s owned by Chase. I’m so very glad this moral cliff was passed…I’m sure the world will end now that a worker bee was forgiven a portion of his debt (and much less than my 20% CASH I put down I may add).

Foreclosures don’t reduce property values….LOFL! Ok, empty and abandoned properties are neutral and do not decline in value…ha ha ha. Ther banksters make better owners than people living in the homes. Good God….goodbye OC blog, it was good in the beginning, but now it’s just a crappy marriage of my time and this place. Divorce has been filed, stamped, and time to go on. GL with your future endeavors to get people to invest.

Moral hazard comes from people who get a break without paying a price. Based on the copious amount of posts you made lamenting your situation, I think most readers here would conclude you paid a very high price for the free money you obtained.

Swiller, so how much of your 20% down did you “get back” if you don’t mind sharing. I lost about 250K from my purchase price when I sold in 2009 due to divorce if it makes you feel any better. Life goes on man!

It really doesn’t matter if you put 20% down, if you still over-extended yourself financing too much house relative to your income – which appears to be the case. You appear to think the conservative LTV means you were being conservative. I disagree with many who think that LTV is the most important factor in determining default, and I appear to have some support:

I stopped by the Augusta development in Columbus Square at lunch today. They started selling/building these over a year ago: 64 detached homes with postage stamp front yards and small side courtyards from 2,587-3,008 sq ft.

The committee drafting the Republican Party’s platform rejected a bid to include a plank calling for preservation of the mortgage interest tax deduction Monday.

The battle pitted allies of the beleaguered real-estate industry – who favor the deduction – against some conservative activists, who favor a simpler tax code with fewer deductions overall. Party leaders also opposed the amendment, hoping to avoid a drawn-out battle over preserving a range of different tax breaks in the party platform.

But some opponents of Monday’s amendment conceded that the home-mortgage break is uniquely important to many voters, and the final vote on the measure was close.

The rejected amendment, proposed by Shirley Wiseman of Kentucky, would have added “We must preserve the mortgage interest deduction” to the party’s platform.

A number of delegates backed the measure, calling it an important statement of support for the struggling residential real estate market and homebuyers.

“This shows the Republican Party’s policy of supporting the middle class, supporting those who want to enter the middle class,” said John Sigler, a delegate from Delaware.

Opponents of the amendment, including former Missouri Sen. Jim Talent, said specific platform provisions on the tax code would bog down the platform and get in the way of major tax reform.

Proposals like this one, said Minnesota delegate Kevin Erickson, are the reason an overhaul of the tax code is so hard.

“As soon as we start talking about it, everyone has a pet one,” Mr. Erickson said. “Comprehensive tax reform that we’re talking about means the entire thing gets redone from the ground up.”

The amendment failed on a show of hands, after committee leaders couldn’t decide which side won a voice vote.